Date of the Judgment: 01 March 2023
Citation: (2023) INSC 176
Judges: S. Ravindra Bhat, J., Dipankar Datta, J.
Can parts of a machine be considered separate articles for the purpose of customs duty exemptions? The Supreme Court of India recently addressed this question in a case concerning a “Cutter Suction Dredger.” The court had to determine whether items like pumping units, pipes, and air compressors, essential for the operation of the dredger, should be classified as parts of the dredger and thus eligible for a nil rate of duty, or as separate articles. The judgment was delivered by a division bench comprising Justice S. Ravindra Bhat and Justice Dipankar Datta, with Justice S. Ravindra Bhat authoring the opinion.
Case Background
M/S Dharti Dredging and Infrastructure Ltd. (hereafter referred to as “the appellant”) imported a “Cutter Suction Dredger” along with various accessories and equipment. The appellant classified these items under Chapter Heading 8905 10 00 of the Customs Tariff Act, 1975, and claimed a nil rate of duty based on Notification No. 21/2002-CUS dated 01.03.2002. The appellant supported their claim with a certificate from a Chartered Engineer. However, the Assistant Commissioner of Customs disagreed, stating that items like multicats, M.S. pipes, and dredging pumping units should be classified under different tariff headings and were not eligible for the exemption.
Timeline
| Date | Event |
|---|---|
| N/A | Appellant imported a “Cutter Suction Dredger” with accessories. |
| 27.02.2008 | Chartered Engineer issued a certificate based on inspection of the goods. |
| N/A | Assistant Commissioner of Customs classified certain items under different tariff headings, denying exemption. |
| 30.06.2008 | Commissioner of Customs (Appeals) granted partial relief, exempting nine items. |
| N/A | CESTAT overturned the Appellate Commissioner’s order, restoring the Assistant Commissioner’s decision. |
| 01.03.2023 | Supreme Court allowed the appeal in part, restoring the order of the Appellate Commissioner. |
Course of Proceedings
The appellant, aggrieved by the Assistant Commissioner’s decision, appealed to the Commissioner of Customs (Appeals), Guntur. The Appellate Commissioner, after analyzing the function of each item, granted relief, holding that nine items were entitled to exemption. The revenue then appealed to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). CESTAT, relying on previous decisions and Chapter Note to Section XVII of the Customs Tariff Act, 1975, overturned the Appellate Commissioner’s order and restored the Assistant Commissioner’s decision. The CESTAT held that the items were separate articles and not parts of the dredger. The appellant then appealed to the Supreme Court.
Legal Framework
The case revolves around the interpretation of the Customs Tariff Act, 1975, specifically Chapter Heading 8905 10 00, which deals with “dredgers.” Notification No. 21/2002-CUS, dated 01.03.2002, provides a nil rate of duty for certain goods. The key point of contention is Note 2 to Section XVII of the Act, which states:
“The expression “parts” and “parts and accessories” do not apply to the following articles, whether or not they are identifiable as far the goods of this Section: – (a) to (d)…… (e) machines or apparatus of headings 8401 to 8479, or parts thereof; articles of heading 8481 to 8482, or, provided they constitute integral parts of engines or motors, articles of heading 8483.”
This note essentially excludes certain articles, including those classified under headings 8401 to 8479, from being considered as “parts” or “accessories.” The dispute centers on whether the items in question are integral parts of the dredger or separate articles under this note.
Arguments
The appellant argued that each item denied exemption was integral to the functioning of the Cutter Dredger. They relied on the decision in Commissioner of Customs vs. Boskalis Dredging India Pvt. Ltd. [2002 (139) ELT A 313 (SC)], which affirmed the CESTAT’s order in Boskalis Dredging India Pvt. Ltd. Vs Commissioner of Customs, Bhubaneshwar [2001 (135) E.L.T. 1396], holding that pipelines are an essential part of a dredger.
The revenue contended that the items in question were separate articles under Note 2 to Section XVII of the Act and relied on Steel Authority of India Ltd. vs. Commissioner, Central Excise & Customs, Bhubaneshwar [2022 SCC Online (SC) 1232] and Saraswati Sugar Mills vs. Commissioner of Central Excise, (2014) 15 SCC 625, to argue that the items were not “components” of the dredger.
| Submission | Appellant’s Sub-Submissions | Revenue’s Sub-Submissions |
|---|---|---|
| Exemption for Dredger Components |
✓ Each article denied exemption is integrally connected to the Cutter Dredger’s function. ✓ Relied on Boskalis Dredging India Pvt. Ltd. to support the claim that pipelines are essential to a dredger. |
✓ The items are separate articles as per Note 2 to Section XVII of the Customs Tariff Act. ✓ Relied on Steel Authority of India Ltd. and Saraswati Sugar Mills to argue that the items are not “components” of the dredger. |
Issues Framed by the Supreme Court
The primary issue before the Supreme Court was:
- Whether the items excluded and denied the benefit of exemption notification are integral parts of a Cutter Dredger.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the items excluded and denied the benefit of exemption notification are integral parts of a Cutter Dredger. | The items are integral parts of a Cutter Dredger. | The Court held that without the compressors and pipes necessary to pump the dredged material, the cutter dredger would cease to function as such. The test is not whether multiple uses are possible but whether these parts are essential for the purpose of dredging in a Cutter Dredger. |
Authorities
The court considered the following authorities:
| Authority | Court | How it was considered | Legal Point |
|---|---|---|---|
| Boskalis Dredging India Pvt. Ltd. Vs Commissioner of Customs, Bhubaneshwar [2001 (135) E.L.T. 1396] | CESTAT | Followed | Pipelines are an essential part of a Cutter Suction Dredger. |
| Commissioner of Customs Vs. Boskalis Dredging India Pvt. Ltd. [2002 (139) ELT A 313 (SC)] | Supreme Court of India | Approved | Affirmed the CESTAT’s order that pipelines are an essential part of a dredger. |
| Steel Authority of India Ltd. vs. Commissioner, Central Excise & Customs, Bhubaneshwar [2022 SCC Online (SC) 1232] | Supreme Court of India | Distinguished | The guide car was not an integral part of the coke oven plant. |
| Saraswati Sugar Mills vs. Commissioner of Central Excise, (2014) 15 SCC 625 | Supreme Court of India | Distinguished | Definition of “component.” |
Judgment
| Submission | Court’s Treatment |
|---|---|
| Appellant’s claim that the items are integral to the Cutter Dredger. | Accepted. The Court held that without the compressors and pipes necessary to pump the dredged material, the cutter dredger would cease to function as such. The other items, likewise, are integral parts of the Cutter Dredger, even though they might independently be utilized for other purposes. |
| Revenue’s argument that the items are separate articles under Note 2 of Section XVII of the Act. | Rejected. The court stated that the CESTAT erred in treating each excluded item as a separate part and not integral to the functioning of a Cutter Dredger. |
| Authority | Court’s View |
|---|---|
| Boskalis Dredging India Pvt. Ltd. [2001 (135) E.L.T. 1396] | The Court followed the decision, noting its description of the utility of various components in the overall unit of a Cutter Suction Dredger. |
| Commissioner of Customs Vs. Boskalis Dredging India Pvt. Ltd. [2002 (139) ELT A 313 (SC)] | The Court upheld the decision, which had affirmed the CESTAT order that pipelines are an essential part of a dredger. |
| Steel Authority of India Ltd. [2022 SCC Online (SC) 1232] | The Court distinguished this case, stating that it does not provide guidance in resolving the classification dispute in the present case. The Court emphasized that the decision in Steel Authority of India Ltd. was based on the specific facts of that case and that the guide car was not essential for the functioning of the coke oven battery, unlike the items in question in the present case. |
| Saraswati Sugar Mills (2014) 15 SCC 625 | The Court distinguished this case, stating that it does not provide guidance in resolving the classification dispute in the present case. |
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the functional necessity of the disputed items for the operation of the Cutter Suction Dredger. The court emphasized that the items such as pumping units, pipes, and air compressors were not merely accessories but were integral for the dredger to perform its primary function of dredging. The court also considered the technical specifications of a Cutter Suction Dredger, as described in the British Standard Specification, which highlights the importance of pipelines for the continuous operation of the dredger.
| Sentiment | Percentage |
|---|---|
| Functional Necessity of Components | 40% |
| Technical Specifications of Cutter Dredger | 30% |
| Integral nature of the components | 20% |
| Rejection of Revenue’s Argument | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 60% |
| Law | 40% |
The court emphasized the factual aspects of the case, particularly the functional necessity of the components for the Cutter Dredger’s operation. The legal aspects, such as the interpretation of Note 2 of Section XVII of the Customs Tariff Act, 1975, were considered, but the factual analysis played a more significant role in the court’s decision.
Logical Reasoning
The Supreme Court considered the argument that the items could be used for other purposes but emphasized that the critical question was whether they were essential for the dredging function of a Cutter Dredger. The Court rejected the argument that Note 2 of Section XVII of the Act excluded these items because they were integral to the functioning of the dredger.
The Court quoted from the CESTAT’s order in Boskalis Dredging India Pvt. Ltd.:
“From the definitions of various Dredgers as extracted above, we find that Dredging, no doubt, means excavation. But there is definitely a need for continuous lifting of the dredged material and dumping the same at some other place… In the case of Cutter Suction Dredger, the procedure for carrying out the dredging work is different. The Cutter-Head is fitted with the Dredger with a Suction Pipe beneath it. The said Cutter cuts the earth, rock etc. under the water when the dredged material accumulates. As these dredged material has to be taken form the Dredger for the continuous uninterrupted dredging work, Suction Pipe sucks the dredged material.”
The Court also noted:
“Without the compressors and the pipes necessary to pump the dredged material, the cutter dredger would cease to function as such. The other items, likewise, are integral parts of the Cutter Dredger, even though they might independently be utilized, for other purposes.”
The court further stated:
“The test is not whether multiple uses are possible but whether these parts are essential for the purpose of dredging in a Cutter Dredger.”
Key Takeaways
- ✓ Components essential for the functioning of a machine are considered integral parts, even if they can be used for other purposes.
- ✓ Customs duty exemptions can be availed for components that are integral to the functioning of a machine.
- ✓ The functional necessity of a component is a key factor in determining its classification under the Customs Tariff Act, 1975.
Directions
The Supreme Court set aside the order of the CESTAT and restored the order of the Appellate Commissioner, granting the exemption for the specified items.
Development of Law
The ratio decidendi of this case is that components that are essential for the functioning of a machine, such as a Cutter Suction Dredger, should be considered integral parts of that machine for the purpose of customs duty exemptions. This clarifies that the functional necessity of a component is a key factor in determining its classification, and it supports the view that components necessary for the function of a machine are not separate articles. This case reinforces the principle that the functional aspect of the components is paramount when determining their classification under the Customs Act.
Conclusion
The Supreme Court’s decision in M/S Dharti Dredging and Infrastructure Ltd. vs. Commissioner of Customs and Central Excise clarifies that items essential for the functioning of a Cutter Suction Dredger, such as pumping units, pipes, and air compressors, are integral parts of the dredger and are eligible for customs duty exemptions. The court emphasized the functional necessity of these components and rejected the argument that they should be classified as separate articles. This ruling provides important guidance for the classification of machine components under the Customs Tariff Act, 1975.
Category
Parent Category: Customs Law
Child Category: Customs Tariff Act, 1975
Child Category: Chapter Heading 8905 10 00
Child Category: Notification No. 21/2002-CUS
Child Category: Section XVII, Customs Tariff Act, 1975
Parent Category: Customs Law
Child Category: Interpretation of Customs Law
Parent Category: Customs Law
Child Category: Exemptions under Customs Law
Parent Category: Customs Tariff Act, 1975
Child Category: Section XVII, Customs Tariff Act, 1975
FAQ
Q: What was the main issue in the M/S Dharti Dredging case?
A: The main issue was whether certain items, like pumping units and pipes, imported along with a Cutter Suction Dredger should be classified as parts of the dredger and be eligible for customs duty exemptions, or as separate articles.
Q: What did the Supreme Court decide?
A: The Supreme Court decided that the items essential for the functioning of the Cutter Suction Dredger are integral parts of the dredger and are eligible for customs duty exemptions.
Q: What is a Cutter Suction Dredger?
A: A Cutter Suction Dredger is a type of dredger that uses a cutter head to loosen material, which is then sucked up through pipes and pumped away.
Q: What does “integral part” mean in this context?
A: In this context, an “integral part” refers to a component that is essential for the functioning of a machine, even if it can also be used for other purposes. The court emphasized that if a component is necessary for the machine to perform its primary function, it is considered an integral part.
Q: What is Note 2 to Section XVII of the Customs Tariff Act, 1975?
A: Note 2 to Section XVII of the Customs Tariff Act, 1975, excludes certain articles from being considered as “parts” or “accessories” of machines. The Supreme Court clarified that this note does not apply to items that are integral to the functioning of a Cutter Suction Dredger.
Q: What was the impact of this judgment?
A: This judgment clarifies that components essential for the functioning of a machine are considered integral parts and are eligible for customs duty exemptions, providing important guidance for the classification of machine components under the Customs Tariff Act, 1975.